SMD boss Andrew Hodgson says offshore sector is set to boom

The £120m sale of SMD to a Chinese buyer demonstrates the on-going strength and healthy long term prospects of the subsea sector, says its chief executive Andrew Hodgson

Andrew Hodgson, managing director of SMD
Andrew Hodgson, managing director of SMD

The global subsea industry has this week descended on Aberdeen for a three-day get-together, with a record 6,000 delegates expected to attend.

Now in its 10th year, the growth of Subsea Expo mirrors the rapid growth of this relatively new industry – an industry which is dominated by UK businesses who account for half of its £20bn annual global sales.

And despite the trials and tribulations of the global oil industry over the last few months, as the oil price has plummeted, the sector is set to more than double in size over the next decade.

Talk of the £120m sale of Wallsend-based SMD to CSR Times Electric, of China, will no doubt echo round the halls and corridors of the Aberdeen Conference and Exhibition centre for the next three days (see panel).

For SMD is one of the founding fathers of the subsea industry and one of a number world-leading subsea companies based in the North East.

Chief executive Andrew Hodgson says its purchase by Hong Kong Stock Exchange-listed CSR demonstrates the exciting future prospects for SMD, and the sector as a whole.

He said: “Business is booming and we have been looking for a long-term investor to take the company forward.

“Many people think of subsea as being just oil and gas but it also includes offshore wind. Unfortunately some companies who have made significant investments around offshore wind are struggling, as this has not come about as quickly as many hoped.

“The oil and gas market is growing by 1% a year and will continue to do so, with many of these new developments taking place in challenging, deep-water environments, which require subsea technology.

“Existing fields deplete by between 5% and 9% a year and this means that more than and more oil and gas has to be found and eventually recovered.

“With oil at $100 a barrel for the last few years this has allowed some of the higher cost reserves, such as those found in the US shale, to secure a larger share of the market.

“While capex is low in the US shale industry the lifting prices are high, but with prices halving we are now seeing a retraction in US shale – just in the last month there has been a significant fall in new drilling activity.

“Subsea wells are making money at $70 to $80 a barrel. At the moment subsea production in offshore fields totals about 15% but this is expected to rise, and subsea is expected to become the dominant form of offshore production within the next 10 years.

“So with a growing worldwide demand for oil, and subsea production being the most cost-effective recovery method, even an oil price of less than $100 a barrel makes the future of the industry look very strong.”

Andrew Hodgson chief executive of SMD
Andrew Hodgson chief executive of SMD

The plummeting price has the seen the oil companies slash capital expenditure budgets, but one oil major’s recent announcement demonstrates its commitment to subsea production, says Mr Hodgson.

“As the oil price has fallen many of the majors have shifted their expenditure programmes to the right - effectively putting them on hold until a new benchmark price emerges from the current market uncertainty.

“It may take a while for the oil companies to sort themselves out in this new environment but Shell’s market update at the end of last month gave a guide to what it is thinking.”

Announcing its first quarter results Shell said it would be cutting back on $15bn of potential expenditure over the next three years.

It went on to say that, while there would be project delays, it would press ahead with plans to drill in the Arctic this year and increase spending on Alaskan exploration, both of which it regards as attractive long-term prospects.

Mr Hodgson said: “What this is telling us is that Shell is switching its focus from shale to subsea. Some £10bn worth of investment earmarked for shale industry is now being directed towards the Arctic and subsea developments.”

SMD evolved from Newcastle University’s agricultural engineering department in 1971 and flourished with the discovery of North Sea oil and the invention of fibre optics.

It created the world’s first subsea trenching, ploughing and cable installation machines and this led to the development of the world’s first ROVs (remotely operated vehicles) for subsea installation and maintenance.

CSR Times Electric, which is part of the manufacturing and engineering conglomerate CSR Group, has pledged to invest heavily in SMD allowing it to grow significantly, and access new markets in Asia and beyond.

Mr Hodgson added: “They approached us some time ago now. They’re involved in propulsion in ships but now want to move into subsea, and see SMD as a perfect starting place.

“We have been building the business to become part of a large engineering group and CSR have global presence and a market capital of around $10bn, so they will help us grow and expand and not just in China subsea markets.

“This is a brilliant fit for us. Our problem has been that constraints we’ve had, in that we’ve only had so much investment capacity which means we’ve had to be selective about what we do, but this will unlock of all that.”

Andrew Hodgson
Andrew Hodgson

Follow Peter McCusker on Twitter @mccusker60

Subsea Expo

Record numbers of delegates from the global offshore oil and gas industry are expected to attend Subsea Expo 2015 which gets underway today in the Aberdeen Conference and Exhibition Centre.

Europe’s largest annual subsea conference and exhibition, the event showcases the expertise and technology of the UK’s subsea sector which generates around £9bn in revenues annually and supports 60,000 jobs, including 15,000 in the North East.

More than 6,000 people are registered to attend the event organised by Subsea UK, including senior industry figures from Africa, Brazil, Japan, Mexico Nigeria and the US.

Neil Gordon, chief executive of Subsea UK, said: “The decline in oil price has not dampened Subsea Expo. Indeed, the need to come together to debate the issues, find new ways of working, look at how we can best deliver efficiency and how to spread the risk by exploring wider, global opportunities is more important than ever, as the number of registrations reveal.

“With the pressure on to reduce costs, Subsea Expo will be very focused on how the subsea industry can play its part in sustaining the industry at this crucial time.

“As has been the case in the past, where there are tough times there are also opportunities and the rewards are still out there. With a fresh approach and collaboration, we can rise to the challenges and ensure the UK’s energy sector continues to lead the world.”

The event’s plenary session will provide an overview of the industry and stimulate debate with presentations from Phil Simons of Subsea 7, David Lamont of Proserv, Apache’s Mark Richardson, EnQuest’s Neil McCulloch and Peter Blake of the National Subsea Research Institute.

The main topics to be explored at the event are maximising global opportunities, key projects around the world, the marine renewables market, standardisation and optimisation, pipelines, ROV and inspection and technology and R&D.

For the first time, the conference will provide a ‘spotlight on technology’ session when a dozen companies will have ten minutes each to pitch their latest developments and thinking to the industry.

Subsea Expo has grown in size and stature since 2004 to become a globally recognised event. It is the second largest oil and gas event in Aberdeen after Offshore Europe.

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